How will Fed bailing out banks increase inflation?

[adaseb]

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

What does everyone think of the feds actions?

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[odolvlobo]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

[EarnOnVictor]

The recent development has exposed the US bank that people had so much trust in once again. This shouldn't have been happening in this century with all gauges/measures at the apex bank's disposal.

Well, this is not the first time that FED is bailing out banks, it only depends on the number of banks and the amount of bailout funds that would determine the extent to which inflation could be induced, it might not even be noticed at all.

Naturally, this should induce inflation by economical interpretation as it would be a situation where more money will be available for little goods and services.

But no one would know the extent now, let the bailout figure and the number of helped banks be ascertained first.

[zasad@]

The Fed is in the business of pumping air into leaky balloons. Banks lead a very risky policy and invest in various cryptocurrency projects. When the market falls, the banks suffer losses. There has already been rhetoric about banning banks from investing in cryptocurrency projects. Perhaps this is a new reason to increase regulation of banks.

[hugeblack]

It is called monetary policy, meaning that I will give something in return for preventing something else. During the past 6 months, the Fed's policy has been to limit hyperinflation to reach a healthy rate of 2%, and it has continued to raise interest rates to curb inflation and reduce market liquidity.

During the past week, a liquidity problem appeared in one of the banks, and thus panic began to affect all customers in most small and medium banks in the United States, and this may lead to the collapse of the economy, which prompted the Federal Reserve to intervene urgently.
So what is happening now is a temporary act to prevent the economy from failing, and it is a more urgent act than fighting inflation.

The problem is that reaction policy always leads to failure because it means economic confusion, so let's see what happens.

[adaseb]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

They do create this money but this money is never spent.

Suppose this,

Its like someone having staked ETH which they couldnt withdraw, ETH foundation created new ETH in exchange for those locked staked ETH so that user could withdraw immediately. Then when those locked staked ETH were unlocked, the ETH foundation would take them back. So the supply remains the same.

The above example is all hypothetical.

[Gyfts]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

There isn't a reason for the fed to introduce even more dollars into the economy after their COVID spending spree. The inflation won't be reversed, the inflation rate will go down but the price increases will still be there. That becomes a problem when the wage increases are disproportional from the inflation rate.

And of course, when the fed introduces new money into circulation, it's difficult to take that money out. Interest rate hikes are the only remedy they have and that has ramifications for GDP growth.

[so98nn]

FED should stop sitting in their warm offices and converting air into Money. They should really start looking after a strategy which will help America to get over the debts they are piling up over the time. If you checkout the real live data of US Income Tax Vs. US Debts then the later one is rising by millions every hours to days. Goa bless America in the upcoming decade.

Many fellow members think that America had been in debts since many years yet it is surviving and stuff like that. However, sooner or later this bubble will burst as well and FED won’t be in the position to overcome the returns after inflation is gone. Because by that time they will realise they are more into debts themselves and there is no more Air to Money conversion.

[Fortify]

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

What does everyone think of the feds actions?

Lots of people don't seem to understand the nuances going on here and with the bonds that these banks bought. Many of these banks bought bonds (very secure money, but when purchased a couple years ago with a ten year maturity, they paid very little due to the interest rate environment at the time) but now if those banks wanted to sell those same bonds, maybe because.. there was a rush of customers who did not feel their money was safe and acted irrationally all at once, then they cannot sell off these low paying bonds quick enough. That's because you can buy newly issued bonds from the government paying much higher rates. So maybe these banks put too much of their money into these fairly illiquid assets and now struggle to cash out, but besides that they are still solvent - at least until their customers all go crazy at once.

[odolvlobo]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

They do create this money but this money is never spent.

Not directly. But, wouldn't you at least agree that the bail out is offsetting disinflation, and that is effectively the same as inflation?

[Hydrogen]

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Its a good question.

The fed "erases" bond losses by expanding its balance sheet to buyout outstanding debt. I think the consensus is this expansion can be relatively contained within banking and financial systems. Without having much of a negative effect on markets or consumers. It doesn't trickle down in a way that directly affects the price of gasoline or eggs.

The evidence for this lies in many banks around the world being bailed out by the fed under the TARP bill from 2009 to the present. Without the process having much of an effect on the price of customer goods. The main difference from previous bailouts to current ones, is banks had better options and a growing economy to work with to payback bailout loans. While in the current market, they have a contracting economy and worsening economic conditions.

Some of what people are calling "inflation" atm is actually due to shipping delays creating artificial scarcity in markets. Which is a trend which has been observed for many years. Most noticeably in raw aluminum markets where coca cola and pepsi were forced to pay considerably higher prices for aluminum for their beverage cans. During a time when shipping delays created artificial scarcity for raw alu metals.

[bittraffic]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

They do create this money but this money is never spent.

Suppose this,

Its like someone having staked ETH which they couldnt withdraw, ETH foundation created new ETH in exchange for those locked staked ETH so that user could withdraw immediately. Then when those locked staked ETH were unlocked, the ETH foundation would take them back. So the supply remains the same.

The above example is all hypothetical.

I don't think that's the right comparison.
When FED is bailing out, the money doesn't just come from someone, they will print more money while people will keep withdrawing their money out of the banks, and ofc this causes inflation. Your $250K may not be worth $250k in the next few months.

ETH foundation afaik will just create a proportionate number of ETH based on the locked/staked ETH. Whether it could be withdrawn or not, it's up to the exchanges.

[el kaka22]

Well sort of will, how? This money wasn't in circulation, now it will go into circulation and that's why it will drop the value of dollar, and that will cause inflation because inflation is basically dollar losing value. When dollar does that, usually most other currencies follow the same path as well, they don't have to but they usually do.

This is why I believe that due to this depositors money being safe type of act they do, which is the right option, inflation will happen. Would you rather let people lose billions and not have inflation, or save everyone's money and have inflation? I feel like they made the right choice with this one.

[FUCKBSVFUCK]

I'm not sure what you mean by "increase inflation" as it sounds to me. 
 
Inflation is an economic phenomenon that has been in existence for thousands of years, and it can be used to create inflation in any form. 
 
The Federal Reserve is one of the in the world, ando so without a third party in its hands. 
 
The US dollar and the European Union are the two most powerful institutions in the world right now. 
 
The Fed is a central bank of the United States, and it has the power to make it easier for anyone to get in, and that's the reason why it’s so important to be part of the Fed. 
 
It’s not just any bank, it’s a whole lot of money.

[mu_enrico]

In most cases, economic inflation is caused by the government, i.e., the central bank's action.
While monetary inflation is always caused by the government, i.e., the central bank's action.

Now, let's take a look about the case:

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.
The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?
Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

- unrealized losses: there are parties who have unrealized profits, the money never disappears, only changes hands.
- if the fed bail the losses without erasing the unrealized profits = monetary inflation.
- monetary inflation -> economic inflation.
- when the loan is paid to the fed, the amount of money in circulation is reduced, but the price most likely won't go back to the previous level. That's because a lot has changed, such as salary. Remember the sticky wage theory.

[Moneyprism]

america's banking system is actually very messy right now,, what the fed is doing is just to slow down this system before it collapses.. if I am an investor, I prefer to invest in banking in China or other countries than in America, that is much better than putting my money there

[Don Pedro Dinero]

Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

If that money does not get into the hands of the people what will happen is that there will be asset inflation and not consumer goods inflation, which is what has been happening for the last 15 years. They told you that inflation was at 2 or 3 per cent when in reality assets such as houses, shares in good companies or bitcoin were rising much more because, due to the Cantillon effect, people who are closer to the printer take a good part of the printed money to these assets.

The Fed creates money to bail out the bank, adding to inflation. When If the money is returned to the Fed, the inflation will be reversed.

Or they will continue to print non-stop, with the odd hint that they will do so as recently, but at the slightest hitch it is business as usual.

[odolvlobo]

In most cases, economic inflation is caused by the government, i.e., the central bank's action.
While monetary inflation is always caused by the government, i.e., the central bank's action.

It's a lot more complicated than that.

Please explain to me why the doubling of the USD monetary base since 2020 has not caused a doubling in prices, and why there has been 10% inflation over the last year while the monetary base has dropped by 15%.

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

[hugeblack]

There are many factors that ultimately lead to an increase in inflation.

Inflation has various sources other than printing money and mismanagement of financial systems. There is inflation that comes from high energy prices, supply chains, retail sales, and others.

It is also a mistake to think that providing liquidity to all these banks means an increase in inflation, because if it does not do so, we may start a financial crisis than 2007–2008 financial crisis^[1], but as a result, the Fed’s move will increase one of the factors of inflation, which may lead to an increase in inflation, or it may not lead.

In general, I fear monetary policy turmoil more than the liquidity problem, because it means pouring water and adding more gasoline to the fire.


[1] https://en.wikipedia.org/wiki/2007%E2%80%932008_financial_crisis

[Don Pedro Dinero]

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

I explained it to you in the post just above this one but you chose to ignore it. Inflation measured as CPI is manipulated downwards by governments, and does not take into account asset inflation. To the supposed low inflation of those 13 years, add the inflation of assets like Real Estate, stock market and Bitcoin among others and you will see where the FED's money has gone.